SECURITIES AND FUTURES COMMISSION v. YEUNG CHUNG LUNG AND OTHERS

HCMP 205/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 205 OF 2013

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J U D G M E N T

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I. Introduction

1.  This is a petition brought by the Securities and Futures Commission (“SFC”) pursuant to section 214 of the Securities and Futures Ordinance (Cap 571) (“the Ordinance”) in respect of the affairs of First Natural Foods Holdings Limited (“the Company”) which is the 4^th respondent to the petition.

2.  By the petition the SFC seeks orders to disqualify the 1^st, 2^nd and 3^rd respondents from being a director or being concerned in any way with the management of any corporation for such period as the court may determine.

3.  The petition sought additional orders to the effect that the Company should issue proceedings against various entities to recover losses it had suffered and that the 1^st respondent should be ordered to pay to the Company HK$84,880,000 being an amount the 1^st respondent had allegedly embezzled from the Company.

4.  Since the matters complained of which occurred between 2007 and 2012, the Company has been placed into provisional liquidation and subsequently restructured such that it now has new owners and managers.

5.  The Company was represented at the hearing of the petition but the 1^st to 3^rd respondents were absent.

II. Background facts

The parties

6.  The Company was incorporated in Bermuda in 2001 and registered as an overseas company in Hong Kong in the same year.  Its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“Stock Exchange”) on 11 February 2002 and remain listed.

7.  The Company was an investment holding company.  The principal activities of the group consisting of the Company and its associates and subsidiaries (“the Group”) was the manufacturing, processing, selling and trading of food products.

8.  Relevant to these proceedings are three operating subsidiaries in Mainland China which the Company owned namely, Fuqing Longyu Food Development Company Limited 福清隆裕食品開發有限公司  (“Longyu”), the major operating subsidiary, Ningbo Dingwei Food Development Company Limited 寧波市頂味食品開發有限公司  (“Dingwei”) and Jia Jing Commercial (Shanghai) Company Limited 嘉璟商業(上海)有限公司 (“JiaJing”) — collectively the “Mainland China Subsidiaries”.

9.  Up until December 2008 when the Board lost or took the view that it had lost control over the Mainland China Subsidiaries most of the profit‑generating business activities of the Group were carried out via the Mainland China Subsidiaries with Longyu being the main subsidiary generating over 95% of the Group’s profits.

10.  The 1^st respondent was the Chairman of the Group and an executive director of the Company until 27 August 2009 when the Board resolved that his offices in the Group be vacated under bye‑law 89(3) of the Company’s Bye‑laws on the ground he had been absent from board meetings for six consecutive months without obtaining special leave of absence from the Board.

11.  The 1^st respondent was the founder of the Group.  He was responsible for the overall planning and strategic development of the Group.  He was a shareholder of the Company beneficially interested in 416,665,000 (35.13%) of its issued shares although after the restructuring his shareholding dropped to 1.30%.

12.  The 2^nd respondent is the son of the 1^st respondent.  He was the Chief Executive Officer and executive director responsible mainly for the overall management, day‑to‑day operations and quality control of the Group.

13.  The 3^rd respondent is the son‑in‑law of the 1^st respondent. He was an executive director responsible for the engineering technology and construction design of the Group.

14.  The 1^st to 3^rd respondents were in full and exclusive control of the management and operations of the Mainland China Subsidiaries. The 1^st respondent was the legal representative of Longyu.  The 2^nd respondent was a director of Longyu and the legal representative of Dingwei and Jia Jing.  The 3^rd respondent was a director of the Mainland China Subsidiaries.

Publication of announcement in December 2008

15.  In December 2008, other than the 1^st to 3^rd respondents, the Board of the Company consisted of executive director Mr Albert Yip Tze Wai (“Albert Yip”) and three other independent non‑executive directors, namely, Mr Wong Chi Keung (“CK Wong”), Mr Leung Chiu Shing (“CS Leung”) and Mr Lu Ze Jian (“ZJ Lu”).

16.  On 12 December 2008, without any prior knowledge of or authorisation by the Board, the 1^st respondent instructed solicitors to draft and submit to the Stock Exchange for approval an announcement of the Company stating, inter alia, that:

(i) the Company had dismissed all its employees with immediate effect on the ground they were not suitable to carry out its business;

(ii) the Company had dismissed its then secretary, accountant andauthorized representative, Mr Henry Chai Chung Wai (“Henry Chai”), with immediate effect;

(iii) the Company could not operate due to the dismissal of all its employees but was considering recruiting suitable employees in due course to enable it to operate.

17.  On the same day the 1^st respondent told Henry Chai he had dismissed all the employees of the Company in Hong Kong with immediate effect, including Henry Chai himself, Albert Yip, CK Wong and CS Leung and the 2^nd and 3^rd respondents and ZJ Lu had tendered their resignations from all offices within the Company.

18.  Henry Chai then immediately told Albert Yip, CK Wong and CS Leung what the 1^st respondent had told him.  Albert Yip then tried to get in touch with the 1^st respondent to find out what had happened.  He managed to talk to the 1^st respondent on the telephone when the 1^st respondent said he would give the Board an explanation the next day.  However, except for that conversation, all further attempts by the Board to get in touch with the 1^st respondent were in vain.

19.  On 15 December 2008, in order to get information about the alleged dismissal of employees and the purported resignations of the various directors, Albert Yip met with the Company’s solicitor who confirmed the 1^st respondent had asked him to submit a draft announcement to the Stock Exchange for approval and issue.

20.  On 15 December 2008, an announcement on behalf of the Company was published on the website of the Stock Exchange stating that:

(i) at the request of the Company, trading in its shares would be suspended with effect from 9:30am that day pending the release of an announcement in relation to price sensitive information of the Company; and

(ii) as at 12 December 2008, the 1^st respondent was the only executive director of the Company and there were no independent non‑executive directors.

21.  On the same day the Company’s solicitor circulated to the Board and the Stock Exchange a further draft announcement.  This announcement recorded, inter alia, the resignation of all the directors of the Company save for the 1^st respondent and the dismissal of all the Company’s employees.  Albert Yip, CK Wong and CS Leung expressed to the Company’s solicitor their disagreement with the contents of the draft announcement and it was accordingly never issued.

22.  On 17 December 2008, CS Leung tendered his resignation to the Board on the ground that, in view of these unexpected events, he was unable to discharge his duties as an independent non‑executive director.

23.  Given the Board’s inability to contact the 1^st respondent, an emergency Board meeting was convened in the evening of 17 December 2008.  Board members were invited to attend by dialling in.

24.  Albert Yip and CK Wong arrived at the Board meeting venue in person at about 6pm.  None of the 1^st, 2^nd or 3^rd respondents dialled in. CK Wong tried but failed to reach them at their usual contact phone numbers. Having waited until about 7pm, Albert Yip and CK Wong decided to start the meeting which was also attended by Henry Chai.

25.  Various resolutions were passed at this Board meeting.  The effect was that the 1^st and 2^nd respondents, ZJ Lu, CS Leung and Albert Yip resigned as directors; Henry Chai resigned all his offices with the Company; Leung King Yue was appointed as an independent non‑executive director; and CK Wong was deputed to take all necessary steps to protect the assets of the Company.

26.  These resignations led to the Company being in breach of various provisions of the Stock Exchange Listing Rules.  To remedy such breaches new directors were appointed over the next few days being Warren Lee Wa Lun (“Warren Lee”) as an executive director and Matthew Tang Chi Chung and Lo Wai On (“Wo Lo”) as independent non‑executive directors.

Appointment of provisional liquidators

27.  Warren Lee and Wo Lo then paid a visit to the offices of the Group in Fuzhou with a view to finding out what had happened and also the status of operations in Mainland China but they were denied entry. Their requests to the banks in Mainland China for information relating to the accounts of the Mainland China Subsidiaries were also declined because they were directors of the Company only and not of the Mainland China Subsidiaries.

28.  The stark reality was that the Board had no means to ascertain the assets of the Group and had in effect lost control of the Mainland China Subsidiaries, which were the main profit‑generating entities of the Group.  In order to preserve the assets of the Group, the Board resolved the Company should petition for its own winding‑up and apply for the appointment of provisional liquidators.

29.  On 6 January 2009, the Company petitioned for its own winding‑up on the ground it was unable to pay its debts as and when they fell due and was therefore insolvent.  On the same day, Mr Stephen Liu Yiu Keung and Mr David Yen Ching Wai were appointed as provisional liquidators.

III.  Investigation

30.  The provisional liquidators then began an investigation into the Company’s affairs and their investigations were subsequently affirmed and supplemented by the SFC’s own investigations.  What was discovered was an apparent trail of false accounting and embezzlement.  This, coupled with the conduct of the 1^st to 3^rd respondents after the appointment of the provisional liquidators, constitutes the foundation of the SFC’s complaints.

False accounting for 2007 and 2008

31.  On 22 April 2008, the Board had announced the audited consolidated results of the Group for the year ended 31 December 2007, showing the Group was financially strong and had a high level of cash and cash equivalents:

	As at 31.12.2007 (RMB)	As at 31.12.2006 (RMB)
Turnover	739,484,000	545,739,000
Gross profit	334,215,000	248,527,000
Profit after taxation	131,035,000	138,006,000
Cash and cash equivalents	724,683,000	673,797,000
Net assets	1,083,565,000	890,933,000

32.  Most of the Group’s cash and cash equivalents were all along held by the subsidiaries in Mainland China.  As represented in the Company’s 2007 Annual Report, the allocation of cash and cash equivalents between the Company and its subsidiaries in Mainland China was as follows:

	As at 31.12.2007 (RMB)	As at 31.12.2006 (RMB)
The Group	724,683,000	673,797,000
The Company	26,612,000	93,100,000

33.  When the Board made an announcement on 18 September 2008 in relation to the Group’s unaudited consolidated results for the 6 months ending on 30 June 2008, those announced results showed the Group still retained a very high level of cash and cash equivalents:

	As at 30.6.2008 (RMB)	As at 31.12.2007 (RMB)
Cash and cash equivalents	792,886,000	724,683,000
Net assets	1,189,007,000	1,083,565,000

34.  According to the Company’s 2007 Annual Report, the Group had deposited its cash with banks in Mainland China and Hong Kong.  Its cash management strategy was to provide flexibility to meet working capital requirements and to fund capital expenditures.

35.  Most of the Group’s cash was apparently held in Longyu’s account (No.00757608091001) at the Bank of China Fuqing Branch (“BOC Fuqing”).  In their audit of the Group’s accounts for the financial years 2006 and 2007, the Company’s auditors CCIF CPA Limited (“CCIF”) obtained from Longyu the bank statements for its account with BOC Fuqing.

36.  In order to verify the details in the bank statements, CCIF obtained directly from the staff of BOC Fuqing confirmations of the balances.  Those confirmations tallied with the bank statements.

37.  However, subsequent investigations painted a markedly different picture.  Through the good offices of the China Securities Regulatory Commission (“CSRC”), the SFC obtained copies of bank statements from BOC Fuqing which showed much lower bank balances.  At no time in 2007 and 2008 did the bank balance exceed RMB 28 million and by 30 June 2008, the credit balance was as low as some RMB 34,250.

38.  The inevitable conclusion seems to be that the auditors, CCIF, were shown false bank statements and the books and records of Longyu had been falsely written up so as to pretend Longyu had substantial cash reserves which were not in fact there.  It is the SFC’s case that the 1^st to 3^rd respondents, as the individuals who had exclusive control over the management of Longyu, must have known about this fabrication of documents to conceal the true picture.  (Of course, there may well have been others involved in this deception, including potentially staff at BOC Fuqing, but that particular issue was not for the court to decide on the hearing of the petition.)

The 1^st respondent’s embezzlement of HK$84,880,000

39.  The Company also had a deposit account (No.9830213001851) with Xiamen International Bank (“XIB”) and the 1^st respondent was the sole authorised signatory to the account.

40.  The provisional liquidators discovered that some HK$85 million odd had been withdrawn in December 2008 from the account at XIB.  When they checked the Company’s books and records, the provisional liquidators could find no record of such withdrawal.

41.  Once again through the good offices of the CSRC, the SFC obtained the statements of the account at XIB.  These showed withdrawals of the amounts of HK$28,000,000, HK$19,800,000 and HK$37,080,000 (being HK$84,880,000 in total) on two consecutive days being 18 and 19 December 2008.  The various sums were remitted, apparently upon the 1^st respondent’s instructions, to the accounts of three Hong Kong companies, being Citiasia International Limited, Skywell Holdings Limited and China Trend International Investment Limited, maintained with Chiyu Banking Corporation Limited in Hong Kong.

42.  The provisional liquidators discovered in the course of their investigation that XIB had advanced loans to Longyu, and, as security for such loans, the Company had pledged the money in the account with XIB.  Longyu repaid the loans in November 2008, which obviously allowed the 1^st respondent to withdraw the money as the money was no longer needed as security.  The account at XIB Account was subsequently closed in February 2009.

43.  It took some while for the provisional liquidators to obtain documents relating to the loans advanced to Longyu and the transactions evidenced by the bank statements for the account at XIB because XIB advised the 1^st respondent had instructed XIB not to disclose any information about the account to the provisional liquidators.

44.  It is the SFC’s case that the withdrawal of HK$84,880,000 was made by the 1^st respondent without any good reason and without authorisation from the Board.  The SFC says the overwhelming inference must be that the 1^st respondent embezzled this amount for his own personal profit.

Obstructing provisional liquidators’ investigation

45.  As well as these historical incidents of apparent misconduct, the 1^st to 3^rd respondents seemingly engaged in a campaign of trying to obstruct the provisional liquidators’ investigation and prevent them from gaining access to information and assets of the Mainland China Subsidiaries.

46.  In February 2009, the provisional liquidators wrote to the 1^st to 3^rd respondents requiring them to provide information about the Company.  The 1^st and 3^rd respondents never replied.  The 2^nd respondent told the provisional liquidators he had resigned from his offices in the Mainland China Subsidiaries and would not disclose any information in relation to the Group. Representatives of the provisional liquidators then tried to visit the Mainland China addresses of each of the 1^st to 3^rd respondents but could not find them.

47.  The provisional liquidators paid a visit to the residence of the 1^st respondent in Hong Kong with a view to ascertaining if any books and records of the Company were stored there, but found the apartment had been surrendered to the landlord in February 2009.

48.  As mentioned above, the 1^st respondent instructed XIB not to give information about the deposit account to the provisional liquidators.  Further, the provisional liquidators’ requests to BOC Fuqing to provide information about the accounts of Longyu fell on stony ground.

49.  Furthermore, the 1^st respondent resisted the attempts of the provisional liquidators to gain control of Longyu.

50.  To regain control over Longyu, the provisional liquidators first replaced the board of First China Technology (Hong Kong) Limited (“First China HK”) (Longyu’s holding company) with Mr Stephen LiuYiu Keung and replaced the board of Longyu with the provisional liquidators and another officer of Ernst & Young Transactions Limited.

51.  The provisional liquidators then applied in Mainland China to the State Administration of Industry and Commerce in Fuqing (“Fuqing SAIC”) for registration of the newly constituted board of Longyu, but the Fuqing SAIC refused to process the application on the ground that Longyu’s company seal and registration certificates had to be provided in support of the registration application.

52.  In March 2009, the provisional liquidators began proceedings in Fuzhou on behalf of First China HK against the 1^st respondent for recovery of the property of Longyu including its company seal and registration certificates.

53.  In July 2009, the Fuzhou Intermediate People’s Court ruled in favour of First China HK declaring that the resolution replacing the board of Longyu was valid and ordering the 1^st respondent to assist First China HK to change Longyu’s registration records.  However, the court declined to order the 1^st respondent to surrender Longyu’s company seal and registration certificates on the ground that the appointed persons remained strangers to Longyu until the registration records were changed.

54.  In September 2009, the 1^st respondent filed an appeal against this decision of the Fuzhou Intermediate People’s Court.  In November 2009, the appeal was heard before the Higher People’s Court of Fujian Province.  By a judgment of 21 December 2009, the Higher People’s Court of Fujian Province upheld the first instance decision of the Fuzhou Intermediate People’s Court.

55.  Although he did not appeal against the decision of the Higher People’s Court of Fujian Province, the 1^st respondent still refused to assist the provisional liquidators in their application to the Fuqing SAIC for the change of the registration records of Longyu.  This led to an application again by the provisional liquidators to the Fuzhou Intermediate People’s Court to enforce the decision of the Fuzhou Intermediate People’s Court.

56.  On 12 April 2010, the Fuzhou Intermediate People’s Court issued an enforcement notice to the Fuqing SAIC concerning the application for change of Longyu’s registration records.  However, the changes in the board and of the legal representative of Longyu sought by the provisional liquidators remained uneffected despite this enforcement notice.

57.  The provisional liquidators then wrote to the Fujian Provincial Department of Foreign Trade and Economic Cooperation Bureau (“Fujian FTECB”), the Hong Kong Economic and Trade Office of the HKSAR Government in Guangdong (“HKETO”), and the Ministry of Commerce of Mainland China to inform these authorities of the difficulties encountered seeking their assistance in replacing Longyu’s board and legal representative.

58.  In August 2010, the HKETO wrote to the Fujian FTECB and the Higher People’s Court of Fujian Province on the matter.  As the Fuqing FTECB did not respond to their request, the provisional liquidators commenced proceedings against the Fuqing FTECB in the Fuqing People’s Court to enforce the decision of the Fuzhou Intermediate People’s Court.  However, the Fuqing People’s Court refused to accept the provisional liquidators’ claim.

Dispossession of the Mainland China Subsidiaries

59.  On 13 January 2009, the provisional liquidators visited the factory of Longyu in Fuqing.  As with the earlier visit of Warren Lee and Wo Lo, they were denied access by the security staff.  On the same day, their representatives visited Longyu’s former registered office and found it was vacant.  It was not until 16 February 2009 that the representatives of the provisional liquidators finally managed to enter the factory of Longyu and found it was still in operation.  The representatives visited the factory of Longyu again in April 2009 and confirmed that it remained in operation.

60.  The provisional liquidators made enquiries with the major customers of Longyu as to their continuing business with Longyu.  One customer, PanaPesca USA Corporation, said Longyu had represented to them it was separate from and unconnected with the Company.

61.  Company searches on Longyu conducted in Mainland China revealed that the 2^nd and 3^rd respondents had been respectively replaced as directors on 10 July 2009 by Yang Jin Hua (a director of Jia Jing) and Ye Neng Di (the legal representative of Le Xin Yuan).  The 1^st respondent remained as a director and Longyu’s legal representative.

62.  On 14 January 2009, the provisional liquidators visited the office of Jia Jing in Shanghai and found it was vacant with the doors locked.  They then visited the retails shops of Jia Jing and found they had ceased to operate.  A subsequent land search revealed that the registered office of Jia Jing was now owned by an unknown individual.

63.  The provisional liquidators discovered the former registered office of Jia Jing was occupied by another Mainland China company in the name of 上海樂信源國際貿易有限公司 (“Le Xin Yuan”), which was in fact the former name of Jia Jing. The provisional liquidators also discovered the workers at that former registered office remained the same despite the change of name, and one of the two shareholders of Le Xin Yuan bore the same surname as the 3^rd respondent.

64.  On 16 January 2009, the provisional liquidators visited Dingwei’s registered address in Ningbo and found it was a vacant plot of land occupied only by a small hut.

65.  The management of the Company considered that control over the Mainland China Subsidiaries had been lost, and the entities were therefore deconsolidated from the Group.

66.  To see the story through to its conclusion, the Company went through a restructuring orchestrated by the provisional liquidators.  It is not necessary for the purposes of this judgment to go into the details of the restructuring.  Suffice to say, at the end of the restructuring the winding‑up petition was dismissed in September 2012 and the Company resumed trading as a listed company but under new management.

67.  However, one aspect of the restructuring which is important for this case is that all claims which were vested in the Company before the presentation of the winding‑up petition, which included of course claims against its former directors for breach of fiduciary duty, were assigned to a special purpose vehicle called Topping Chance Development Limited (“Topping Chance”).  Topping Chance is controlled by the former provisional liquidators of the Company (who are now known as the Scheme Administrators) and any recoveries it makes are to be held for the benefit of the Company’s creditors as at the date of the presentation of the winding‑up petition.

IV.  Section 214 of the Ordinance

68.  Section 214(1) of the Ordinance provides, in so far as it may be relevant, that:

“(1) Where, in relation to a corporation which is or was listed, it appears to the Commission that at any relevant time the business or affairs of the corporation have been conducted in a manner –

(a) oppressive to its members or any part of its members;

(b) involving defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

(c) resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; or

(d) unfairly prejudicial to its members or any part of its members,

the Commission may … by petition apply to the Court of First Instance for an order under this section.”

69.  The Company has at all material times been a listed corporation.  I am also satisfied that the conduct which is the subject of the SFC’s complaint is conduct of the affairs of the Company.  While much of the conduct related to the affairs of the Mainland China Subsidiaries, the observations of Chu J (as she then was) in Securities and Futures Commission v Fung Chiu [2009] 6 HKC 423 at §§19‑20 are entirely on point in this case:

“19. Under the second condition that the business or affairs must be that of the listed corporation, in the context of a group of companies, it is possible that, depending on the facts, the business or affairs of one company may also be that of another company. As was observed by Sir Martin Nourse in Gross v Rackind [2004] EWCA Civ 815, at para 26,

‘… the expression ‘the affairs of the company’ is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary.’

See also Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360; Arrow Nominees Inc v Blackledge [2000] 2 BCLC 167: and Jesner v Jarrad Properties Ltd [1993] BCLC 1032.

20.  In my view, a realistic approach should be adopted in considering whether the affairs of a subsidiary may be regarded as that of the holding company.  In cases where, as here, the principal business and activities of the group is undertaken by the subsidiary in question and the listed company is essentially an investment holding vehicle, it is legitimate for the Court to take a broad and overall view of the situation and to regard the affairs of the subsidiary as the affairs of the holding corporation.”

70.  In this case, the SFC invokes all four limbs of section 214(1) when considering the conduct in question.  I propose to consider each limb separately.

S 214(1)(a)

71.  There is no definition of “oppressive” conduct in the Ordinance.  What constitutes “oppressive conduct” has never been exhaustively defined judicially, but it typically involves an abuse of one’s rights or powers as a majority to procure the occurrence or non‑occurrence of events unfair or prejudicial to the complainants who, by reason of their minority status, can only submit: Scottish Co‑operative Wholesale Society Ltd v Meyer [1959] AC 324; Re H R Harmer Ltd [1959] 1 WLR 62.

72.  In Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042, 1059G‑1060A, Buckley LJ defined oppressive conduct in section 210 Companies Act 1948 as follows and stressed oppressive conduct was not equivalent to misfeasance:

“What does the word ‘oppressive’ mean in this context? In our judgment, oppression occurs when shareholders, having a dominant power in a company, either (1) exercise that power to procure that something is done or not done in the conduct of the company’s affairs or (2) procure by an express or implicit threat of an exercise of that power that something is not done in the conduct of the company’s affairs; and when such conduct is unfair or, to use the expression adopted by Viscount Simonds in Scottish Co‑operative Wholesale Society Ltd v Meyer [1959] AC 324, 342 ‘burdensome, harsh and wrongful’ to the other members of the company or some of them, and lacks that degree of probity which they are entitled to expect in the conduct of the company’s affairs: see Scottish Co‑operative Wholesale Society Ltd v Meyer and In re H R Harmer Ltd [1959] 1 WLR 62. We do not say that this is necessarily a comprehensive definition of the meaning of the word ‘oppressive’ in section 210, for the affairs of life are so diverse that it is dangerous to attempt a universal definition. We think, however, that it may serve as a sufficient definition for the present purpose. Oppression must, we think, import that the oppressed are being constrained to submit to something which is unfair to them as the result of some overbearing act or attitude on the part of the oppressor. If a director of a company were to draw remuneration to which he was not legally entitled or in excess of the remuneration to which he was legally entitled, this might no doubt found misfeasance proceedings or proceedings for some other kind of relief, but it would not of itself amount to oppression. Nor would the fact that the director was a majority shareholder in the company make any difference, unless he had used his majority voting powers to procure or retain the remuneration or to stifle proceedings by the company or other shareholders in relation to it.”

73.  The Hong Kong courts applied that test of “oppressive conduct” for the purpose of the old section 168A Companies Ordinance:  Re Taiwa Land Investment Co Ltd [1981] HKLR 297, 304A‑B per Fuad J.

74.  The hallmark of oppressive conduct, as is clear from the passage of the judgment of Buckley LJ in Jermyn Street Turkish Baths Ltd, is that the oppression occurs when shareholders with a dominant power in the company exercise that dominance as shareholders rather than as directors.  An obvious example would be where there is a suggestion of breach of fiduciary duty by a director who is also a majority shareholder.  He causes the company to pass a shareholders’ resolution in which it is resolved the company should take no action against him for his alleged breach of fiduciary duty.  It is not the alleged breach of fiduciary duty which is oppressive but the use of the dominant shareholding power to prevent the company from seeking redress for such breach of fiduciary duty.

75.  In deciding therefore whether a company’s affairs have been conducted in a manner oppressive to members under section 214(1)(a) of the Ordinance I consider regard should therefore be had to whether a person has asked oppressively qua shareholder rather than qua director.

76.  It is perhaps apposite to note that in England section 210 Companies Act was in fact replaced by section 75 Companies Act 1980 which introduced the statutory remedy of unfair prejudicial conduct.  The current English provision is section 994 Companies Act 2006 which is mirrored in section 724 Companies Ordinance (Cap 622).

77.  Accordingly neither the courts in England or Hong Kong have had to consider what constitutes “oppressive conduct” for several decades.  However, the concept has now come back because of section 214(1)(a).  That being so, I see no reason why the test should be any different to that articulated in the context of minority shareholders petitions under section 210 Companies Act 1948.

S 214(1)(b)

78.  “Defalcation” is defined in section 1, Part 1 of Schedule 1 of the Ordinance to mean “misapplication, including misappropriation, of any property”. This can only refer to misapplication or misappropriation of property of the listed corporation, and its subsidiaries/affiliates, where appropriate.  The word “property” is also broadly defined in the same section of Schedule 1 to the Ordinance.

79.  “Misappropriation” is a commonly understood word.  It is defined at page 1689 of Volume 2 of Stroud’s Judicial Dictionary of Words and Phrases (7^th Ed) to be the wrongful conversion of or dealing with anything by the person to whom it has been entrusted.

80.  Misappropriation usually connotes wrongful taking away of property.  Misapplication is wider in the sense there is not necessarily an abstraction of property.  The term is defined in the context of a director’s trusteeship of a company’s assets in §16[2] Gore‑Browne on Companies (45^th Ed) as follows:

“any disposition of the company’s property which by virtue of any provision of the company’s constitution or any statutory provision or any rule of general law the company or the board is forbidden or incompetent or unauthorised to make, or which is carried out by the directors otherwise than in accordance with their duties in good faith to promote the success of the company and for the proper purposes. This second limb covers not only misappropriations of the company’s property, but also dispositions in favour of third parties which do not satisfy the test of good faith.”

81.  “Misfeasance” as defined in section 1, Part 1 of Schedule 1 means “the performance of an otherwise lawful act in a wrongful manner”.  The notion considerably overlaps with that of breach of fiduciary duty and has in fact been held to include breach of duty by an officer resulting in an improper application of the company’s assets or property including property or money which should have come to the company but has been diverted: Gore‑Browne on Companies §61[12].  The term misfeasance seemingly therefore covers a wide range of misconduct.

82.  In what may be something of a belt and braces exercise, the limb of “or other misconduct” has been added to section 214(1)(b) presumably to cover the widest range of possible misconduct.  As an example, in Re Riverhill Holdings Ltd [2007] 4 HKLRD 46, Kwan J (as she then was) held (at §15) that the failure of a director to exercise the requisite degree of skill and care in the management of a company as may reasonably be expected of a person of his knowledge and experience and holding his office and functions within that company was enough to establish misconduct under section 214(1)(b).  As Chu J noted at §21 in Securities and Futures Commission v Fung Chiu the term “other misconduct” may embrace “improper or wrong behaviour or mismanagement or culpable neglect of duties”.

S 214(1)(c)

83.  It is not apparent there has been any detailed analysis in the authorities of this subsection and what would therefore constitute a failure to give all information relating to a listed company’s affairs which its shareholders might reasonably expect to receive.

84.  The circumstances in which section 214(1)(c) might operate independently of the other subsections of section 214(1) do not appear to have been the subject of considered authority.  It can easily be seen how section 214(1)(c) can be complementary to the other subsections.  For example, if a director has embezzled the company’s assets, bringing himself prima facie within the ambit of section 214(1)(b), one can readily see why this is information relating to the company which its shareholders might reasonably expect to be given.  It is not so easy to think of examples where the affairs of a company have been conducted with no suggestion of impropriety on the part of its directors and with no suggestion of unfair prejudice to the shareholders yet where it can confidently be said shareholders have been deprived of information which they might reasonably be expected to be given.  It is perhaps not helpful to hypothesise other than to say such circumstances may arise and will be evident when they do.

S 214(1)(d)

85.  On the definition of misconduct I can do no more than repeat the observation of Chu J in Securities and Futures Commission v Fung Chiu at §22 with which I am in complete agreement:

“22. In respect of subsection (1)(d), it covers unfairly prejudicial conduct towards members of the company. There is a substantial body of authorities on the meaning of ‘unfairly prejudicial conduct’. For the present purpose, it suffices to note the observations of Rogers J (as he then was) in SFC v Chesterfield Limited HCMP 3504/1994 (unreported, 22 May 1995), when dealing with the term in the context of s 37A(1) of the repealed Securities and Futures Commission Ordinance (Cap 24):

“10. In my view, conduct which is unfairly prejudicial is conduct which results in harm to the members of the company or part of the membership in their capacity as members of the company. The harm is harm which could either have been avoided or ameliorated without harming the legitimate interests of others who were parties to the particular transaction.

  11. It covers a range of conduct.  At one end of the scale is fraud.  At the other end of the scale the conduct can take the form of neglect or inaction on the part of those to whom the affairs of a company are entrusted.  The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted.  The directors of course cannot leave their duties to be performed by others.’”

Listing Rules

86.  The SFC also asserts that the conduct of the 1^st to 3^rd respondents constituted a breach of the Listing Rules and in particular Rules 3.08(a), (b), (d) and (f) which read as follows:

“3.08. The board of directors of a listed issuer is collectively responsible for the management and operations of the listed issuer. The Exchange expects the directors, both collectively and individually, to fulfill fiduciary duties and duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director:

(a) act honestly and in good faith in the interests of the company as a whole;

(b) act for proper purpose;

…

(d) avoid actual and potential conflicts of interest and duty;

…

 (f) apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the listed issuer.”

87.  The Listing Rules are a contract between a company and the Stock Exchange while they are made by the Stock Exchange and approved by the SFC pursuant to provisions in the Ordinance.  I am not persuaded a breach of the Listing Rules necessarily means the affairs of a company come within the purview of section 214(1) of the Ordinance.  There may be conduct which constitutes both a breach of the Listing Rules and a breach of section 214(1) but I am not sure a consideration of the Listing Rules is helpful when determining whether a disqualification order should be made under section 214.

88.  To the extent therefore that the petition pleads that the 1^st to 3^rd respondents have been in breach of the Listing Rules, I have not thought it necessary to consider this when determining whether the SFC has made good its case on liability under section 214(1).

V. Findings

89.  With these principles in mind, I turn to consider how they should apply to the facts of this case.

The false announcement

90.  The publication of the false announcement on 15 December 2008 concerns the conduct of only the 1^st respondent.  There is no suggestion the 2^nd and 3^rd respondents had anything to do with the announcement.  Indeed, it was stated in the announcement they had both resigned all offices in the Company.

91.  As the 1^st respondent did not appear in these proceedings no explanation has been tendered on his behalf as to the announcement.  On its face the announcement was clearly false in that the Company had not dismissed its employees nor had, so far as the Company was aware, its various directors resigned.  Even at the time the 1^st respondent offered no explanation for why he caused the false announcement to be made.

92.  The SFC asserts that the 1^st respondent’s conduct in publishing the false announcement was incompetent and negligent as well as constituting misfeasance or misconduct.  I agree.

The embezzlement of HK$84,880,000

93.  There is no explanation before the court as to why the deposit at XIB in the sum of HK$85 million odd was uplifted by the 1^st respondent, divided into three amounts and remitted to the accounts of three Hong Kong companies which are unconnected with the Company.

94.  In the absence of any explanation, the court can only conclude the 1^st respondent has embezzled the money for his own personal benefit.  Embezzlement of the assets of a company by one of its directors is a fraud and a defalcation and falls squarely within the conduct referred to in section 214(1)(b) of the Ordinance.  I have no doubt the 1^st respondent’s misconduct could also be described as being unfairly prejudicial to the Company’s shareholders thus engaging section 214(1)(d) and also being something the Company’s shareholders might reasonably have expected to be told about thus engaging section 214(1)(c) as well.  I am not persuaded, however, for the reasons set out above, that the 1^st respondent’s defalcation was undertaken qua shareholder and thus I do not think the misconduct is oppressive within the definition of section 214(1)(a).

False accounting

95.  The SFC asserts in the petition that the 1^st to 3^rd respondents acted either fraudulently or in a grossly incompetent manner in respect of the massive overstatement of the cash balances held by Longyu with BOC Fuqing.  Again, in the absence of any explanation from the 1^st to 3^rd respondents, one can only conclude the 1^st to 3^rd respondents knew about these misstated cash balances and acted fraudulently in covering up the true state of the Company’s financial affairs.

96.  For the same reasons I identified with regard to the 1^st respondent’s embezzlement, the fact the 1^st to 3^rd respondents have been found to have acted fraudulently ipso facto means the SFC has made good complaints of breaches of sections 214(1)(b), (c) and (d) of the Ordinance.  Again, however, for the same reason as with the 1^st respondent’s embezzlement I am not persuaded there is a breach of section 214(1)(a).

Obstruction of the provisional liquidators

97.  Unlike embezzlement and false accounting, I am not sure one can conclude it is fraudulent conduct for a director or former director of a listed Hong Kong company to obstruct provisional liquidators in the exercise of their powers of investigation, which powers are wide powers specifically given to them at law to allow the affairs of an insolvent company to be looked into.  I am quite satisfied, however, that it is misfeasance and misconduct for a director or former director so to obstruct provisional liquidators who are, of course, officers appointed by and answerable to the court.

98.  Nothing has been put before the court to gainsay what the SFC says in the petition happened as a matter of fact when the provisional liquidators went about their work.  Sadly, it seems the legal representative of a Mainland China company can throw all sorts of obstacles in the way of any attempt to investigate the affairs of that Mainland Chinese company even when, as here, the Mainland Chinese company is a wholly‑owed subsidiary of a Hong Kong listed holding company.

99.  Whilst someone may engage in such a campaign of obstruction and not be subject to criticism by the courts or regulatory authorities in Mainland China he should not expect that the court in Hong Kong will stand idly by.  I have no hesitation in finding the SFC has made good its case of breaches of sections 214(1)(b), (c) and (d) against each of the 1^st to 3^rd respondents.

Dispossession of the Mainland China Subsidiaries

100.  As with the obstruction of the provisional liquidators, there are no facts before the court to refute the SFC’s allegation that the Company’s Mainland China Subsidiaries have been put beyond the Company’s control by the acts of the 1^st to 3^rd respondents.  Again this constitutes a prima facie case of misfeasance or misconduct and again I find the SFC has made good its case of breaches of sections 214(1)(b), (c) and (d) against each of the 1^st to 3^rd respondents.

Disqualification order

101.  I therefore find that the SFC has proven the allegations in the petition against the 1^st to 3^rd respondents and a disqualification order is the proper sanction to be imposed.

102.  Disqualification orders are made primarily for two objectives: the protection of the public and general deterrence. See Securities and Futures Commission v Fung Chiu [2009] 6 HKC at §55.  A practice has grown up whereby a potential disqualification period with a maximum of 15 years is broadly divided into three brackets of five‑year periods.  Obviously the more serious the misconduct, the higher the bracket.

103.  In the present case, each of the 1^st to 3^rd respondents has treated the Mainland China Subsidiaries as if they were their own personal assets rather than being assets of the Company.  In so doing they have acted in total disregard of the interests of the shareholders of the Company.

104.  Given their roles in the Group, the 1^st to 3^rd respondents must have known about the false accounting which led to a material overstatement of the Company’s cash position and can only have led to shareholders investing in the Company based upon materially misleading information.

105.  Once the whistle was blown the 1^st to 3^rd respondents made every effort to prevent the true facts from coming to light.  They obstructed at every turn the provisional liquidators in their enquiries and attempts to secure control over the Mainland China Subsidiaries.  This obstruction ultimately provided successful in that the Mainland China Subsidiaries were in effect dispossessed from the Company.

106.  The 1^st respondent’s misconduct is more egregious.  Not only was he a party to the false announcement in December 2008 but he has apparently embezzled without explanation a sum of HK$85 million odd from the Company.  There is no doubt this brings him into the highest bracket in terms of disqualification.

107.  In conclusion I consider the appropriate period of disqualification for the 1^st respondent is 12 years whilst the appropriate period for each of the 2^nd and 3^rd respondents is 8 years.

Order for restitution

108.  The petition originally sought an order that the Company should issue proceedings to recover the HK$85 million odd apparently embezzled by the 1^st respondent.  As a matter of fact, proceedings had been issued by Topping Chance to recover this sum but for a variety of reasons, including difficulties over service, the proceedings had not been pursued.  Any fresh action for the recovery of this sum by Topping Chance would now be statute‑barred and the SFC therefore no longer seeks this head of relief.

109.  The SFC did, however, still maintain the claim in the petition for an order that the 1^st respondent be liable to pay the HK$85 million odd to Topping Chance as assignee of the claims of the Company.  Section 214(2)(e) of the Ordinance gives to the court a power to make any other order it considers appropriate.  This is a very broad jurisdiction and it was clearly intended that the court should, on being satisfied that a complaint has been made good under section 214(1), be given the widest powers to do justice.  I am therefore satisfied the court has power to order that the 1^st respondent be ordered to repay to the Company the money he has on the face of it embezzled from the Company.  I am also satisfied that this power extends to ordering the 1^st respondent to pay the money to the legitimate assignee of the Company’s claim in respect of this sum being Topping Chance so that any sum which may be recovered is available for distribution to the Company’s creditors.  The Scheme Administrators have indicated their consent to this proposed order.

110.  Interest should also be paid on the amount embezzled from the date of embezzlement.  As to the amount of interest I am content to follow that prescribed by Barma J (as he then was) in Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325 where he directed that interest should be paid at 1% above HSBC’s prime rate such interest to be compounded annually.

Costs

111.  The SFC asks that the 1^st to 3^rd respondents be ordered to pay the costs of the petition on an indemnity basis and I consider that is the appropriate order.

112.  Of more difficulty is the question of costs between the SFC and the Company.  The SFC submits there should be no order as to costs while the Company asks that the SFC should bear the Company’s costs of attending on the hearing of the petition although it agrees the correct order as to the other costs of the petition is no order as to costs.

113.  The Company’s position is that it explained it was, in effect, under new management after the restructuring in an affirmation filed by a director, one Yau Dennis Wai Tak, as long ago as 5 June 2013.  In that affirmation, Mr Yau said the Company took a neutral stance on the petition.  He explained the details of the restructuring, the establishment of Topping Chance as assignee of the Company’s claims and the fact therefore that an order made against the Company under section 214(2)(b) would be otiose.

114.  At the directions hearing before Harris J on 22 March 2016, the SFC apparently confirmed it would not seek an order against the Company under section 214(2)(b) not least because any relevant claim was now statute‑barred. The Company maintains that the SFC sought its attendance at the hearing of the petition because it would be necessary and helpful.

115.  In the event, the SFC accepted the affirmation of Mr Yau and did not seek to cross‑examine him on it.  Furthermore, so says the Company, there is nothing the Company has been able to tell the court which is of any assistance in disposing of the petition.  As the Company is under new management, it is in effect an innocent party so it should not have to bear the costs of what has been a fruitless attendance.

116.  I have some sympathy for the Company.  However, it must not be forgotten the Company is the same legal entity as that which existed when the matters which were the subject of the petition occurred.  The fact the Company may now have different shareholders and directors does not detract from the fact that the Company was originally a rightful party to the petition and that the SFC was compelled to bring the petition because the affairs of the Company were misconducted by some of its previous directors.

117.  I think in the circumstances of this case it would not be right to order that the SFC pay any part of the Company’s costs, particularly as I do not think the Company’s costs of attendance on the petition hearing alone will be substantial.  However, I should caution that the SFC should not assume the court will come to the same conclusion in future cases and real thought should be given as to whether it is necessary for a company to attend on the hearing of the petition when that company has made its position clear in affidavit evidence both as to the stance it is taking on the petition and in providing to the court all material information.

Conclusion

118.  In summary, I therefore made the following orders:

(i) A disqualification order against the 1^st respondent for 12 years;

(ii) Disqualification orders against each of the 2^nd and 3^rd respondents for 8 years;

(iii) An order that the 1^st respondent pay to Topping Chance HK$84,880,000 together with interest thereon compounded annually at the rate of 1% above HSBC’s prime rate from 19 December 2008 until the date hereof;

(iv) The 1^st, 2^nd and 3^rd respondents do pay to the SFC its costs of the petition on an indemnity basis with a certificate for two counsel;

(v) There be no order as to the Company’s costs of the petition.